Friday, February 9, 2018

Richard M. Ebeling: Debt ceiling hysteria and profligate government

Once again, the financial fears have been ratcheted up due to recent announcements by the U.S. Treasury Secretary, Steven Mnuchin, and the Congressional Budget Office (CBO) that by the middle of March 2018 the federal government will have run out of room to continue borrowing due to the official debt ceiling. Some are now calling for scrapping a legal debt ceiling altogether, and to allow Uncle Sam to have an unlimited line of credit. This is a bad idea.

Back in September 2017, Congress and the President agreed to temporarily suspend the Federal debt ceiling until December 8, 2017. Whatever might be the cumulative outstanding debt at that time would become the new legal ceiling, unless Congress voted to raise it, which did not happen. So when December 8 rolled around, the total federal debt, due to continuing government borrowing in the last months of 2017, came to around $20.5 trillion.Debt default drama and ending the debt ceiling

Since then the Treasury Department has been applying a variety of previously used devices out of its grab bag of tricks to shift funds around and delay paying into a number of federal accounts to keep spending more money than it has been taking in, in taxes. As a result, de facto outstanding federal debt now stands at over $20.63 trillion and rising.

Once more the bugaboo of “default” has been heard in various quarters unless the debt limit is increased by mid-March, when the Treasury’s accounting manipulations will have reached their end; unless, of course, the Congress and the President agree to raise the debt limit or to simply jettison the existing legislative rule of a federal debt ceiling altogether.

James Capretta, a senior research fellow at the American Enterprise Institute, recently proposed repealing the debt ceiling legislation in an opinion piece that appeared on the website of Real Clear Policy on February 2, 2018. Mr. Capretta argued that having the debt ceiling fosters concern about a default on interest payments coming due on past debt that could seriously and dangerously shake the credit-worthiness of the U.S. government in financial markets around the world. Concerns about Uncle Sam’s willingness and ability to pay its global creditors in a timely fashion, due to the debt limit, also weakens the U.S. as an attractive destination for foreign investors to put their money, Mr. Capretta reasoned.

Since the federal government has not been operating within a Congressionally passed budget for the current 2018 fiscal year that began on October 1, 2017 and which runs to September 30, 2018, it is only possible to estimate government expenditures, tax revenues and the likely deficit for Uncle Sam’s budgetary twelve months. But as a basis for analysis, in 2017, the Congressional Budget Office projected total government spending in FY 2018 likely to be almost $4.1 trillion, tax revenues from all sources of about $3.5 trillion, with a resulting budget deficit of around $600 billion.Debt interest coming due, just cut spending by 8 percent

The CBO also estimated that net interest payments for the current fiscal year would be about $307 billion, or about 7.5 percent of all government spending. This means that if the debt ceiling were not to be raised, it would require the federal government to reduce spending by less than 8 percent in all other activities to meet the interest obligations to both domestic and foreign holders of U.S. federal debt.

Even if “mandatory entitlement” spending – Social Security and Medicare – that takes up about 50 percent of all federal spending were considered to be “off the table” for any cut, then that requires just a 15 percent reduction in that other 43 percent of the non-net interest part of the budget. It seems hard to believe ways could not be found to cut merely 15 cents out of each of those non-“entitlement” dollars spent by Uncle Sam. Even if defense spending were to be considered “untouchable” due to Republican insistence on maintaining at least the current level of such expenditures, it is still hard to believe that $307 billion out of spending on non-defense “discretionary” outlays could not be reduced in some way, shape or fashion.

The fact is, therefore, there is no threat to the U.S. government defaulting on interest payments on outstanding debt. As for principal payments on any of the debt that may come due, the current debt limit does not preclude the Treasury Department from simply rolling over maturing debt, while keeping the total under the legal debt ceiling.

Debt crisis hides real problem – government spending

Once again, this is all smoke and mirrors to avoid dealing with the fundamental and underlying problem: the continuance of and increases in the American interventionist-welfare state. This is the crux of it all. Neither Democrats nor Republicans want to have to “face the music” and tell their respective constituents that given current levels of federal taxation (including under the new tax law passed in December 2017), the U.S. government does not take in enough in taxes to meet all the existing programs and desired legislative promises that have put all of them into high political office.

Deficit spending and the inescapable rising national debt that accompanies it enables politicians to tell the coalitions of special interest groups that vote on election day that Uncle Sam can give them something for nothing, or if not for nothing, then for less than what all of those government giveaway programs really cost.

If we use the Congressional Budget Office’s projection for fiscal year 2018 as a benchmark of government of likely spending and taxing, the federal government will spend about 15 percent more than it takes in, in taxes, thus generating that possible $600 billion deficit. This means that voters are being told that for every $100 of government spending they, the taxpayers, will only have to cough up $85 dollars in taxes. What a bargain; the politicians are offering a “15 percent off sale” to attract voter-customers who want something from the political trough in Washington, D.C.

Now, of course, that so-called “discount” on government transfers and redistributive funding – for everything from National Public Radio to farm subsidies, from military hardware contracts to Social Security payments, from regulatory agencies micro-managing how private enterprises do business to national security surveillance of everything we electronically say and write, and from billion dollar cash handouts to foreign governments to fighting wars in far-off lands – all do have to be paid for.

Budget deficits are paid for now and in the future

They are paid for both in the here and now, as well as in the future. Those who have benefited over the years from the annual deficit spending that has resulted in that $20.6 trillion debt have left a loan payback burden on their children and grandchildren who, in principle, will be taxed to pay in the years and decades-to-come on at least the growing net interest payments on that growing debt.

This is equivalent to a mom and a dad who go on a spending binge, max out their credit cards, and then leave it in their wills that all the debt they have accumulated just having fun “now” while they have been alive, is to be considered a legal obligation for their sons and daughters to pay off after they have gone. “Oh, and ‘P.S.’, we loved you so much that we wanted to leave you something that you’d remember us for every day of your lives.”

But the national debt is not simply an intergenerational transfer for others to be taxed to pay off in the future, given what has been borrowed in the past or in the present to benefit those living in an earlier time. It is also a real transfer from one portion of the current generation to another. The fact is what is borrowed today represents a shifting of the use of real resources to the government for the benefit of those upon whom the goods and services are spent that is made possible by those government-borrowed real resources; that is the portion of the society’s savings that is taken out of the hands of those in the private sector who otherwise could have borrowed those real resources and devoted their use to market-based investment and production.

Even if a part of those privately borrowed resources had been used to finance the purchase of a car or to cover the mortgage on a home, or even to just go on a “dream” vacation, it would have been a private individual making his own time valuational choice and decision to be willing to trade away a portion of his own future productively earned income as repayment of the principal and interest so as to have had the benefit and use of a desired consumer item closer to the present.

But with government borrowing, it is politicians spending other people’s money and resources on those who have put them in office at the current expense of private persons would have been able to borrow that money and those resources for various consumer and investment purposes of their own voluntary choice. And it is those same politicians who place a debt obligation on some as yet undesignated future taxpayers to pay back what they have siphoned off through borrowing to serve their own current political ends and those of the special interest groups to whose demands they pander.

Debt ceilings meant to limit government

If there is a legal federal government debt ceiling and that ceiling is reached, it then requires those in Congress to either go through the process of rationalizing or justifying why its legislatively imposed line of credit on the global financial markets should be raised, or for the government to now operate on the basis of a balanced budget. If the debt ceiling is not increased, then the federal government lawfully can only spend what it takes in, in taxes. That is, expenditures on all items may not exceed revenues collected from all tax sources. In other words, the government functions in the confines of an annual balanced budget. (See my article, “The National Debt Limit Equals a Balanced Budget”.)

Any dollar the government spends must be matched by a clear and designated tax dollar collected from someone. The cost of anything and everything the government does is now far more transparent to taxpayers and voters. There are no (or at least far fewer) “free lunches” under the illusion that government can give that something for nothing; or at a discounted tax price of what it really costs in terms of scarce resources in society transferred from the private sector to government through borrowing.

This is why Mr. Capretta’s policy proposal to abolish the federal government’s debt ceiling is so importantly undesirable. Congress could then pass and every president could then just sign off on any future federal government budget they want that serves their agreed-upon political interests with far less concern or second thought about how much the inevitable annual budget deficits are adding to the national debt.

The debt ceiling makes those in political office and the voter-taxpayers more aware of how much has been accumulated due to those budget deficits in terms of total outstanding government debt. And that makes it a more conscious decision whether or not to allow Uncle Sam to keep eating up more and more of society’s productive resources and wealth through borrowing, and the greater tax burden being placed upon the citizens of the future, including our children and grandchildren.

The crisis is not debt default, but too much government spending

But what about Mr. Capretta’s fear that the periodic political battle in Washington, D.C. about raising the debt ceiling threatens to rattle global financial markets and undermine America’s credit-worthiness status? I would suggest that it is better to risk this than to brush the debt problem under the political rug and make it less publicly out of sight of the American citizenry through abolishing a debt ceiling rule.

The end of the road of not facing where America’s rising national debt is leading us is what we witnessed over the last several years in the national debt crisis in Greece. It might be said that we are not Greece; we are a bigger and financially and productively far more robust and successful economy, out of which the debt burden can be carried.

No doubt the politicians of every country that eventually faced a national debt crisis and potential or real default said the same about their own country’s ability to keep borrowing year after year. Greece has been able to get other members of the European Union and global organizations like the International Monetary Fund to finance the government’s “embarrassment” of not being able to fund all that was coming due out of what they owed.

Who would “bail out” America if such a dangerous day of reckoning were to arrive or appear much closer on the horizon? Mars, Jupiter, Saturn, Venus? It certainly will not be China, the Arab oil countries, Japan, or even sovereign wealth funds such as those held by the governments of Norway or Holland.

The fundamental budgetary problem faced by the United States government is the total amount of what it spends from taxing and borrowing combined. That is the measure of how much of what people honestly produce in society is actually taken away from their hands and coercively shifted into the decision-making grasp of political plunderers. It arises from a political and ideological environment in which government, over decades, has come to be viewed as a vehicle through which some in society can get what they want from others through the use of political means rather than peaceful, market-based productive means.

Big government is the true source of the debt problem

The financial crisis in America is not that government cannot borrow more due to a legal debt ceiling. It is due to a government that already taxes, spends, and regulates far beyond the Founding Father’s conception of a constitutionally limited government meant to only secure the life, liberty, and honestly-acquired property of all who live and work within its jurisdictional confines.

The debt limit rule imposes on the country an awareness of exactly how much out of control government has become, especially, though not only, in its fiscal extravagance. It forces people to think or rethink what is it that government is doing that should cost so much, and particularly in the form of a borrowing that facilitates those running for political office and holding such power to avoid speaking the truth to the citizens of the country about what it costs in lost personal and financial freedom from every dollar the government borrows and then commits the existing and future generations to have to pay for.

Rules serve to do two things: They direct people’s conduct within the confines of certain corridors of behavior and action, and they remind people why certain forms and types of conduct are to be considered good, better or right compared to others. Budgetary rules, including debt ceilings, are meant to limit how profligate governments can be with other people’s money, both in the present and across generations.

We need some “teach-ins” during such moments of budgetary crisis to get people to rethink what it is that government is for and what it should not be for; and to challenge deficit spending that is a form of fiscal governing that enables those in government to hide the truth about what everything they are doing really costs in lost liberty and financial servitude to the state.

About the author: Dr. Richard M. Ebeling is the BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel. He was formerly professor of Economics at Northwood University, president of The Foundation for Economic Education (2003–2008), was the Ludwig von Mises Professor of Economics at Hillsdale College (1988–2003) in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation (1989–2003).

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